Public Investment in a Developing Country Facing Resource Depletion

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Summary:

This paper analyzes the tradeoffs between savings, debt and public investment in the Republic of
Congo, a developing country with looming oil exhaustibility concerns. Our results highlight the
risks to fiscal and capital sustainability of oil exporting countries from large scaling-up in public
investment and oil price volatility in view of a projected decline in the oil revenue to GDP ratio.
However, structural reforms that improve the efficiency of public investment can allow for a
relatively faster buildup of sustainable public capital and sustain higher non-oil growth without
adversely affecting the debt ratio or savings. Moreover, we show that even if a government
pursues prudent fiscal policy that preserves resource wealth and debt sustainability in the face of
exhaustible and volatile resource revenues, low public investment quality in the form of a
misallocation of resources can hinder attainment of sustainable public capital and positive non-oil
growth.